A Precarious Price Point for the Precious Metals

Once again, both gold and silver prices are at a crossroad. On a technical basis, they are at a critical support level. Whether or not prices at these defined support levels hold will be a great indicator as to the next big move in gold and silver pricing.

The technical levels we are talking about are Fibonacci-based retracements of the yearly trading range for both gold and silver. Interestingly enough, both gold and silver’s pricing are currently resting precisely at a 61% retracement.

When we look at the low price that gold traded to this year, we find that it occurred at the beginning of the year. Gold traded to an intra-year low of approximately 1050. From there, it rallied, reaching its yearly high in July, at approximately 1380.

The price differential between the yearly high and the yearly low is $330. A 61% retracement of 330 is 200. Adding $200 to the yearly low of 1050 will result in a 61% retracement of the yearly range.

The chart labeled chart1_gold (in the chart section below) is a weekly bar chart containing a Fibonacci retracement study. The current price of gold is roughly 1170, which is clearly right at the 61% retracement level of 1169.

Interestingly enough, silver pricing is at that same precarious price point. Calculating the Fibonacci retracement for silver prices yearly range is the same calculation used for gold. This places the 61% retracement for silver at $16.52.

The chart labeled chart2_silver (in the chart section below) is a weekly bar chart of silver with a Fibonacci study included.

Both gold and silver prices have lost 61% of their highest yearly value. Both price points sit precariously just at this level. Most technical analysts agree that the 61% retracement level is a critical level. In order to analyze and conclude that the current sell-off is a correction to a bullish rally, it is important that this level holds.

A break below this level could signal that the current sell-off is not a corrective wave to the recent rally, but rather the primary direction that the market is moving. This could be followed by a rally that would be considered the corrective wave.

There is certainly a case be made for precious metals trading lower. A strong US dollar could continue for an extended period of time. Coupled with an extended rally in US equities, this would certainly put dynamic pressure on safe haven investments such as gold and silver.

There is also a case to be made for the extreme selling witnessed recently in precious metals, resulting in an extremely oversold market. This would of course necessitate a weaker US dollar and equity, moving from risk on investments to safe haven plays, which could be the result of uncertainty next year.

In either case, how gold and silver prices react at these critical price points will give traders an indication as to the future long-term direction of gold and silver prices.

Wishing you as always, good trading,